RPT-UPDATE 2-Metro eyes Russian unit IPO by second quarter of 2014

Wed Nov 20, 2013 10:37am EST

(Repeats with no changes)

* Considers floating 25 pct stake

* To value business at no less than 4 bln euros - source

* Will be competing with Lenta for investor attention (Recasts with focus on profit margins, adds comments on valuation, background)

By Matthias Inverardi and Megan Davies

DUESSELDORF/MOSCOW, Nov 20 (Reuters) - Germany's Metro AG , aims to list up to a quarter of its Cash & Carry Russia business in London by the second quarter of 2014, three sources familiar with the deal said.

The initial public offering (IPO) is likely to value the unit of Europe's fourth-biggest retailer at 4 billion euros ($5.4 billion) or more, one of the sources said.

It will be competing for investors with local rival Lenta, which is also planning a flotation in London early next year. Lenta is controlled by state bank VTB and private equity fund TPG.

"Metro wants the IPO to show the value of the Russian business - but to keep as much of it as possible," said one capital markets banker working with Metro on the IPO plan. "At the most, they'll sell 25 percent in the IPO."

The listing would take place in London, with a secondary listing possible in Moscow, according to another of the sources. The sources said it could happen at the end of the first quarter or the start of the second quarter of 2014.

Banks have not yet been mandated to organise the flotation, they added. Other sources said on Tuesday that Sberbank and Goldman Sachs were likely to work on the IPO.

HIGH PROFIT MARGINS

With most publicly-listed retailers still recording growth of up to 30 percent annually, Russia remains one of the fastest-growing retail markets in the world.

Metro's Russian cash-and-carry unit expanded its sales by more than 20 percent last year to 4.1 billion euros, placing it fourth after X5, Magnit and France's Auchan.

Analysts estimate that Metro boasts higher profit margins in Russia than in other markets as it has expanded from low-margin distribution to small and medium sized enterprises and also sells to individual customers.

"The question is how many ordinary people go there, boosting the margin," said VTB Capital analyst Maria Kolbina, who estimates the profit margin to be significantly higher than most cash-and-carry chains in Europe.

Poland's Eurocash had an EBITDA - earnings before interest, taxation, depreciation and amortisation (EBITDA) - margin of 2.96 percent last year. Metro does not disclose profit numbers for separate markets but had indicated to analysts that Russia is its best market in terms of core profitability.

Analysts said the unit could fetch a lofty valuation. Citi estimates it could even be worth as much as 8 billion euros.

"Metro C&C Russia is the star operation of the group," Citi analysts said in a research note. "There may be some 'hidden value' revealed by listing Russia."

They estimate the unit has an EBIT margin of 12 percent which could justify a valuation multiple of 11 times EBITDA - lower than Magnit at 14 times EBITDA but higher than the other major Russian grocers which trade around 7 times EBITDA.

Investors in Russia frequently complain about poor corporate governance, including weak minority shareholder rights and a lack of information on some companies, but Metro Russia was seen as less of a risk.

"Investors looking at Russia fear the unpredictability of corporate governance - a concern they don't have in Metro's case," said the capital markets banker.

Metro, which said Tuesday an IPO of a stake was under consideration, declined to comment on Wednesday. ($1 = 0.7394 euros) (Reporting by Matthias Inverardi and Arno Schuetze in Duesseldorf/Frankfurt, Megan Davies, Olga Popova and Maria Kiselyova in Moscow; editing by Victoria Bryan and Tom Pfeiffer)